What is Asset Protection?

What is asset protection?  Some attorneys consider it a separate practice area; some attorneys consider it in their regular business, corporate/LLC law, and real estate practice.  Simply, "asset protection" is the practice of protecting your assets from creditors.  Granted, you cannot 100% protect your assets from creditors, but you can protect certain assets from certain creditors.  

For example, you can protect your personal assets from business creditors.  The easiest step is to incorporate or organize a business into a corporation or limited liability company.  After that, the business should be operated as a separate entity than its owners.  Only pay company obligations with company assets.  If there is money available to the owners, either pay a salary or a distribution to the owners.  If properly setup and operated, for example, an LLC member's personal assets should not be subject to the creditors of the LLC.

That fundamental principle leads to other ideas.  What assets should an LLC owning a business have?  Should it own an investment account at a brokerage company that is not used for operations?  If a company has non-operating assets, then those assets are subject to the claims of the company's creditors.  Those assets should be distributed to their owners, who can later reinvest or loan some of the assets to the company if needed for operations.  Important tax considerations are necessary when transferring assets from a company to its owners, but such considerations are outside the scope of this article.  Consult a tax advisor or this firm.

Second, assume a business desires to own its own space, such as an office building, manufacturing plant, or warehouse.  A business that owns its own space would subject this real estate to the claims of its creditors.  Why do that?  Instead, setup a separate company to own the real estate, and this separate company will lease the facility to the operating company.  If bank financing is involved, a bank should have no problem with this basic structure.  In fact, a bank should desire it, because the real estate will not become subject to the claims of the business's general creditors, thereby avoiding any judgment liens against the property and forcing a foreclosure by the bank (the bank would have priority but banks do not want collateral with judgments even if inferior).  It is unknown why banks do not require separate holding companies; the question has flummoxed the author for years.  In any event, the operating business will be on the hook for the loan as a co-borrower, and the members or owners of the entities will likely provide guarantees.  Nothing has changed, except one additional borrower exists.  

The above planning steps are basic asset protection strategies.  Nothing above asserts that a party should not be responsible for, and pay, its obligations, but at the same time, a person should protect his interests and his business, especially if he has employees whose livelihoods depend on that business.  Thus, these steps are in addition to having adequate insurance to protect the assets and business from liability.  Finally, you should always conduct a lawyer who is knowledgeable in the areas of business law and tax law before implementing any steps to "protect your assets."